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Calculation of Retention

The following example shows the calculation of Subcontractor Retention deductions and the appropriate GST:-

A builder may engage an air-conditioning subcontractor to supply and install a system for a total of $200,000.

The Subcontract Agreement includes a provision requiring the Subcontractor to make Claims (not Tax Invoices and to accept Recipient Created Tax Invoices (RCTI) from the builder. The agreement also quotes a retention rate of "10% to 5%".

The Retention Rate used means that over the Project, a total Retention of 5% or $10,000 with be withheld from monies paid. And to quickly build a Retention pool of funds, Retentions will be deducted at the rate of 10% until the 10,000 target is reached – after which no Retentions will be deducted.

During the installation the subcontractor makes their first progress claim of $50,000 based on an assessment of work to date. The builder disagrees with the assessment of work completed and reduces the approved value of work by $2,000.

Therefore the builders records would show:

Claim Value

$50,000

Less disapproved

$ 2,000

Approved Claim Value

$48,000

Less Retention

$ 4,800

Value Approved for Payment

$43,200

Plus GST

$ 4,320

Direct Deposit/Cheque Amount

$ 47,520

Retention Liability on completion

$ 4,800

The second Progress Claim made by the subcontractor is for $100,000. Again the Builder disagrees with the assessment of work completed and reduces the approved value by $10,000

The builders records would now show:

Claim Value

$ 100,000

Less disapproved

$ 10,000

Approved Claim Value

$ 90,000

Less Retention

$ 5,200

(since Maximum is $10,000 and $4,800 is already withheld)

Value Approved for Payment

$ 84,800

Plus GST $

8,480

Direct Deposit/Cheque Amount $

93,280

Retention Liability on completion

$ 10,000

This Retention will be released to the Subcontractor in two $5000 payments – one at the Practical Completion of the Project and the second at the expiration of the Defects Liability period – typically 12 months later.